Royal Dutch Shell plc Sends a Ton of Mixed Messages This Quarter

If you have ever been to the point of pulling your hair out in frustration because a significant other sends you mixed messages about what they want to do on date night, then you have an idea of what it was like trying to understand the earnings and subsequent management messages from Royal Dutch Shell . According to the company's fourth-quarter earnings release, profits were up, but income was down. Spending is headed down, but Shell plans to continue exploring for what will be some of the most expensive oil out there. Confused yet? Let's take a look at what seems like a contradictory mess and determine what it means for Shell shareholders.

Here's some of the important numbers from this past quarter and how they stack up from a year prior.

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What are those funky CCS earnings?One of the things that may confuse some investors when they look at this past quarters results is the difference between net income and current cost of supplies earnings. According to net income, this quarter was miserable, but on a current cost of supplies basis the numbers look pretty healthy.

The reason that there is a difference is a result of some accounting trickery. Current cost of supplies, also referred to as replacement cost profit, is a way that companies can express their profit as if every barrel of oil that they "bought" through exploration and production was based on current price of oil and gas. However, many of the barrels that were produced were not developed under today's prices -- in all likelihood they were developed under a much higher price a few years ago.

Since there is a major discrepancy in the price at which they were developed and the price at which they were sold, we see this major difference in net income versus current cost of supply earnings. The easiest way to think of them is that as oil prices decline, CCS earnings will be higher than net income, and vice versa when oil prices increase.

Even though these numbers are rather confusing, they are by far less important than cash flow since earnings and income can be drastically affected by non-cash items such as asset write downs, depreciation, and amortization. Looking at cash flow for Shell, this past quarter didn't look that bad. Operational cash flow increased as the company shed some of its higher cost production sources and a few of its lower return refineries in Europe in 2014. At the same time it spent $9 billion less on capital expenditures over the previous year that helped to increase free cash flow.

Source: Olav Gjerstad via commons.wikimedia.org.

To spend, or not to spendLooking at the 2014 numbers, it looks like Shell was slightly ahead of the curve when it came to focusing on profitability before oil prices really started to sink their teeth into the industry. The company is looking to continue this trend by cutting spending by another $5 billion from capital expenditures -- about 15% -- in 2015.

In theory, this sounds great. Lower capital expenditures while times get rough over the next few years will prevent the company from stretching itself too thin. The issue isn't in the total money that the company is spending, though, it's where the company is deciding to spend it. As part of the earnings release, CEO Ben van Beurden announced that the company would resume its operations in the Chuckchi Sea in Alaska by the end of the year. While there is vast potential in this area, it has proved difficult and expensive for Shell as it has spent close to $4 billion exploring the Alaskan waters without a discovery yet.

So not only is the company cutting its total capital expenditures, but it is also focusing those capital expenditures on more challenging and complex -- also known as more expensive -- sources of crude. Many of these capital investments will take many years to pan out and we have no idea what oil prices will be during those times, but it puts Shell in a little bit more of a boom or bust position than some of the other big oil companies that are looking to develop some lower cost sources of production.

What a Fool believesEarnings, as well as the announcements regarding its capital spending and allocation, suggest that the company is going in a couple different directions. Shell has a reputation as the engineers oil company that takes on the difficult projects compared to its other Big Oil peers, but CEO Ben van Beurden is trying to pull the company toward a more capital disciplined approach. These two things will likely cause the company to be pulled in different directions, and it may make it challenging for investors to know what the future holds for this company.